The New Zealand Superannuation Fund (NZS) scaled back its holdings of local equities by almost $500 million over the 12 months to June 30 this year, the latest annual accounts show.
According to the NZS annual report, the approximately $30 billion fund held close to $1.5 billion in NZ equities as at June 30 this year compared to more than $2 billion 12 months prior.
Despite a shrinking local shares portfolio, the NZS topped up its newest external NZ equities appointment, Mint Asset Management, to the tune of $70 million this June.
The accounts show Mint managed about $246 million in NZ shares for the fund as at June 30 this year after securing a $150 million mandate in July 2015. Devon, the remaining other external NZ shares manager after the formal exit of Milford Asset Management during the fiscal period, looks after a portfolio of almost $340 million for NZS, according to the report.
Based on the figures, the NZS internal local equities team would have a portfolio of close to $1 billion to manage.
“We remain committed to using a combination of external managers alongside our internal team to manage the Fund’s NZD1 billion plus portfolio of New Zealand equities…,” the NZS 2016 report says. “The New Zealand active equities portfolio (internal and external) returned 22.7% for the 2015/16 year. The Active NZ Equities internal team returned 462 basis points (net of costs) above the S&P/NZX50 Index, the benchmark for the mandate.”
Over the 12 months to June 30 the S&P/NZX50 benchmark returned just under 22 per cent.
While the nominal value of NZS investments in local assets has jumped from $2.4 billion in 2009 – when the government issued a directive to the fund to increase exposure to NZ – to $4 billion as at the latest count, the total percentage has since fallen.
“In the seven years since 1 July 2009, the proportion of the overall Fund that is invested in New Zealand (in value terms) has reduced from 21.3% to 14.79%,” the NZS report says.
“The proportional drop reflects the strong performance of global equities in recent years. We have also taken advantage of favourable market conditions in New Zealand to reduce or sell down some of our local investments, such as our holding in Z Energy.”
NZS has about 75 per cent of the portfolio invested passively (split about 80/20 between equities and fixed income) with three managers handling the bulk of those duties. According to the NZS report, in total the trio manage about $14 billion for the fund divided among BlackRock ($4.7 billion), Northern Trust ($4.95 billion) and State Street ($4.1 billion).
In August 2016, NZS also awarded Northern Trust a further $1.2 billion to invest in two ‘smart beta’ strategies.
During the current year, the NZS would be considering a shift to a more concentrated portfolio for its equity holdings, the annual report says, to investigate “the benefits of concentrating on fewer stocks at lower cost”.
Overall, the NZS returned just 1.89 per cent before NZ tax, beating its reference portfolio by 0.52 per cent but falling behind its other benchmark, the NZ Treasury Bill index, which hit 2.54 per cent in the year to end June.
Due to the vagaries of the NZ tax system – which taxes most global equities according to a deemed dividend of 5 per cent by asset value whatever the actual result – the NZS report a post-tax gain of just over $21 million on profit of almost $600 million.
The ‘fair dividend rate’ – or FDR – accounted for about $512 million of the NZS’ $538 million tax bill (effectively 96 per cent of profit), the report shows.
Despite racking up annual expenses of almost $100 million during the year – comprising external manager fees ($27.3 million), personnel costs ($30.5 million – including a $1 million payout for CEO, Adrian Orr), and other costs ($29.1 million) – the figure was almost $60 million under budget.
“Expenses were lower than budget predominantly due to lower remuneration and travel costs,” the NZS report says. “This was due to recruitment activity being slower than was envisaged in the budget.”